In 2008-09, with home foreclosures skyrocketing in the wake of the economic meltdown[1], New York led the nation in developing measures to aid struggling homeowners. The state legislature enacted a law requiring that banks negotiate in “good faith” with homeowners at a mandatory court-supervised settlement conference within in sixty days of suing for foreclosure. The new law instructed the court system to issue rules granting the state’s judges “the necessary power and authority … to “ensur [e]” both side negotiate in good faith and that settlement conferences “not be unduly delayed or subject to willful dilatory tactics.”

Despite that sweeping authority, the good-faith law is silent on the question of remedy, and for the last five years, the requirement that banks negotiate in “good faith” with New York homeowners has been an obligation in search of a remedy. In a handful of rulings, the state’s appeals courts have only told the judges and referees responsible for supervising the settlement process what they could not do to compel banks to act in good faith.

With one exception, all of the appellate rulings have come out the Appellate Division, Second Department in Brooklyn, which hears appeals from the four counties with the highest number of pending foreclosures in the state: Nassau, Suffolk, Brooklyn and Queens. The sole other ruling was from the First Department, which sits in Manhattan.

Those rulings have rejected judges’ use of compulsory orders and punishing fines to force banks to reach a reasonable accommodation with homeowners or even to require them to make good on their offers to lower payment terms. Meanwhile, no appellate court has put its imprimatur on the most promising remedy that has been adopted by trial judges: the forfeiture of interest and other lender costs, including attorneys fees, which have mounted during delays caused by the absence of good-faith negotiations.

But, the issue is now coming to a head. At least two cases are pending—one in the First Department and one in the Second—squarely presenting the question of whether forfeiture, commonly referred to by lawyers as “tolling”) is a viable remedy.

In the interim, the law books have become littered with cases, in which trial judges and referees have found that banks have failed to negotiate in good faith. Numerous opinions cite delays of up to two years and as many as 17 adjournments.

The causes have been manifold: banks had no representative present with authority to negotiate despite a clear statutory mandate to do so; bank representatives were unfamiliar with the cases and did not have critical documents related to homeowners’ loans; banks had backtracked on modification agreements even though homeowners had paid the lower amount for the three months required in many instances by federal guidelines—and often for many months more; and banks, only belatedly after months of negotiations, have advised homeowners and the courts that they were barred from negotiating any payment relief in situations where a mortgage has become part of a pool aggregated by an investment syndicate.

Two Pending Appeals

Both of the cases on appeal present those issues, which over and over again, have formed the basis of trial court rulings, finding the banks had not negotiated in good faith.

In the case pending in the Second Department [U.S. Bank National Association v. Green, 9220/09 (Kings County)], Brooklyn Justice Donald Scott Kurtz ordered the tolling of interest and related charges, confirming a referee’s finding that the mortgage holder, after ten months of back and forth, had denied the homeowner a modification even though the owner had successfully paid the lower amounts for three months.

At about the same time the holder, an investment syndicate, raised a new issue: it was forbidden from making any loan modification by the agreement it used to sell mortgage-backed securities.

To speed a resolution, the referee, who oversaw the settlement discussions, ordered syndicate officials, with personal knowledge of the pooling agreement, to attend the conference and produce associated documents. Nonetheless, the settlement process dragged on without resolution for another 19 months (bringing the total delay to more than two years) before the referee recommended to Kurtz that the syndicate be compelled to reinstate the 2010 trial modification. Kurtz in March 2013 ordered tolling but rejected the recommendation that the syndicate be ordered to re-activate its modification.

The case pending in the First Department also presents, in stark form, the same recurring problems that have hindered the settlement process.

As was the case in Green, the settlement process in Citibank v. Barclay (Bronx County) dragged on for 11 months without resolution,. During that time, the homeowner attended nine conference sessions, submitted six original applications for a loan modification and was on numerous occasions asked to submit additional documentation even though that information had previously been supplied. Also, similar to Green, the homeowner in Barclay had been engaged in the settlement process for nearly a year before being informed by Citibank that investor restrictions precluded it from modifying the mortgage.

Bronx Justice Robert E. Torres, the trial judge in Barclay, made specific findings related to several of those points. With regard to authority and knowledge, he noted that the bank’s loan adjuster had testified before the referee that she had personal authority to modify mortgages and that she had been personally involved with the homeowner’s loan modification for three years. But on cross-examination, he noted, she admitted that she was assigned to Barclay’s loan file shortly before the hearing and that she had been asked by the bank to “come in and …do a more in-depth detailed investigation of files.”

Torres also wrote that the bank’s “bit by bit requests at each conference only serve to unnecessarily delay the modification application process while racking up interest, fees and penalties to the [Bank’s] benefit and [Barclay’s] detriment.”

AG Office Cites Wells Fargo Violations

Lest there be any doubt about the extent of those problems, the New York State Attorney General’s Office has developed evidence that Wells Fargo Bank has committed close to 200 violations of standards developed to speed loan modifications. The standards are contained in a $25 billion settlement reached in 2010 between the nation’s attorneys general and five major banks, including Wells Fargo. The evidence, which consists of sworn declarations by advocates, together with supporting documentation, in cases involving 97 New York homeowners, has been offered by the state Attorney General’s Office in litigation seeking to force Wells Fargo to live up to the 2010 settlement, U.S.A. v. Bank of America, 12-cv-361 (District of Columbia). Read the Attorney General’s brief. The case has been briefed, and a decision is being awaited from U.S. Judge Rosemary M. Collyer.

Similarly, a report prepared by three legal services groups found a widespread failure of banks to have a representative with settlement authority and knowledge of the homeowner’s case present at settlement conferences. The three groups—JASA/Legal Services for the Elderly in Queens, Legal Services NYC and MFY Legal Services—sent observers to 252 settlement conferences conducted in the fall of 2013. The observers reported that in 80 percent of the cases the banks failed to have present representatives with the settlement authority and knowledge required by New York law. In 36 percent of the observed cases, no bank representative was present with the authority to settle as required by CPLR 3408(c) and in 44 percent of the cases the representative lacked sufficient information to permit a conference to proceed.

Briefing in the Barclay case is nearly complete and is underway in Green. The two arguments have taken on outsized importance. Two months after Kurtz embraced tolling, but rejected mandating reinstatement of a withdrawn modification offer, the Second Department nixed specific performance in Wells Fargo Bank v. Meyers, 108 A.D3d. 9 (May, 2013). In Meyers, however, Justice Thomas A. Dickerson, who wrote for a unanimous panel, underscored the need for guidance from either the legislature or the court system as to what type of remedies should be imposed for violations of the good-faith requirement.

Further, earlier this year, a push by homeowners’ advocates for legislation spelling out remedies fell to the wayside as legislators limited their efforts to extending the mandate for settlement conferences another five years to 2020.

Court System’s Unexercised Power

In Meyers, Dickerson pointedly drew attention to the court system’s failure to develop sanctions for “egregious behavior” by the banks or their counsel despite having been specifically authorized by the legislature to do so.

Dickerson quoted from a provision in legislation adopting the good-faith obligation which “expressly” provided that the rules to be promulgated by the Chief Administrator of the Courts to govern settlement conferences “may include granting additional authority [to the states’ judges] to sanction the egregious behavior of a counsel or party.” Read the statute.The court system’s authority to issue a specific sanction or remedy has not been exercised, he wrote.

Meyers, much like the two cases pending on appeal—Green and Barclay—presented issues of the recurring problems experienced by homeowners in the settlement process. In Meyers, the homeowner attended eight court appearances which stretched out over eight months; was offered a modification lowering his monthly mortgage payments by $700 and met those payments for at least seven months; and was advised by the bank—six months after it had proposed a modification—that investor restrictions precluded the changing of the loan’s terms.

Nonetheless, the Second Department rejected the use of specific performance (legal jargon for a compulsory order to reinstate a withdrawn modification) despite sympathetic facts. The homeowner was a New York City police officer, Paul Meyers, who had taken a second job and worked overtime to keep up with his mortgage payments. In 2009, Meyers fell behind in his payments when he lost his second job and the NYPD cut back on overtime. Further his wife, Michela, testified at a good-faith hearing before then-Suffolk Justice Patrick A. Sweeney that Wells Fargo employees told her that a modification could not be offered unless she and her husband defaulted on their payments; and they had followed that advice.

Sweeney, finding bad faith after conducting a three-day hearing, ordered Wells Fargo Bank to reinstate the September, 2009 modification offer and dismissed the foreclosure proceeding. But, the Second Department reversed, concluding that an offer of a trial modification is not a binding contract and to enforce it would violate the Contract Clause of the U.S. Constitution.

Some lawyers for homeowners, who have examined the trend of the Second Department’s post-Meyers decisions, have raised questions whether they will support a ruling upholding tolling as a viable remedy for good-faith violations. But, Karen Gargamelli, the lawyer with Common Cause NY who is handling the Barclay appeal in the First Department, called such an outcome “inconceivable.”

Recent Signs of Progress

Since Meyers was handed down, there have been some signs that progress has been made with respect to some of the problems that have bogged down the settlement process. First, the state Attorney General’s network, which consists of 90 groups the office has funded to provide lay counseling and legal aid to homeowners, has helped one-third of the 28,000 clients it has worked with to obtain modifications or, at least, the possibility of a modification, according to Melissa Grace, a spokeswoman for the office.

Out of that universe, the Attorney General’s network represented 8,000 homeowners during the settlement process. No separate data was provided concerning the success of those clients in obtaining modifications. The network is funded with $60 million the Attorney General’s Office received from the 2010 nationwide settlement with five major banks.

Second, the court system in late June authorized administrative judges in Nassau, Suffolk and Brooklyn to receive direct referrals of cases from referees (bypassing the judge to whom the case has been assigned) to hear legal issues that they do not have the authority to resolve. Court sources suggest that since judges, but not referees, are empowered to order sanctions, that the change will speed rulings on disputes over whether banks are acting in good faith.[2]Read the memo.

Third, homeowner advocates report that Bank of America in April flew into New York about a dozen workout specialists, led by two bank vice presidents, who ended working on two days with close to 100 Nassau County homeowners facing foreclosure. Maria DeGennaro, an attorney with the Empire Justice Center who oversees the work of 13 homeowner advocacy groups on Long Island, stated that the Bank of America had taken initiative in asking the courts to set aside one day with all Bank of America cases on the conference calendar.

“The workout specialists provided something that is sorely missing in most conferences,” DeGennaro added, “real-time information about the status of modification requests, with the result that some cases were resolved on the spot.” The 13 Long Island-based groups are a part of the network of agencies funded by the New York State Attorney General’s Office to provide counseling and representation to homeowners struggling with their mortgages.

Unfortunately, there is little data available to assist the state’s appellate judges as they wrestle with the problem of shaping appropriate remedies when banks fail to act in good faith. The annual report issued by the court system provides little meaningful information other than the number of homeowners who are represented during the settlement process. According to the 2013 report, 54 percent of the families participating in settlement talks during that year had representation.

The Attorney General’s office has not yet compiled data on the number of homeowners who lost their homes during the settlement process, Ms. Grace said, because the conference process is dynamic and yields hundreds of possible outcomes.